JPMorgan Predicts Dollar Drain Worst Since ’02: Argentina Credit

Central bank reserves fell six percent in the first
quarter, the most for the period in six years, and sank below
$40 billion this month for the first time since 2007. As
investors await a U.S. court ruling on whether the nation must
pay holdout creditors including billionaire Paul Singer from its
2001 default, the extra yield they demand to own Argentine debt
instead of Treasuries rose to 12 percentage points this year.
That’s almost twice the premium similarly rated Belarus and
Ukraine pay, leaving Argentina as the only distressed borrower
among 55 emerging markets tracked by JPMorgan Chase & Co.

The drain on Argentina’s reserves, which Fernandez has used
for public spending and payments to bondholders since 2010, is
set to accelerate as revenue growth from agricultural exports
slows, JPMorgan estimates. Reserves will tumble at the fastest
rate in a decade by year-end, leaving Argentina with just $37.5
billion. That would only cover 75 percent of the country’s
foreign-currency debt obligations due from 2014, Economy
Ministry data show.

“What the market looks at is the country’s ability to pay
in the future,” Mariano Tavelli, president of brokerage Tavelli
& Cia., said in a phone interview from Buenos Aires. “For now,
we don’t see a genuine stream of dollars coming in that will
replenish the reserves we’re losing.”

Debt Payments

The government has made about $755 million in debt payments
this year by drawing down central bank reserves. The treasury
gets money from the central bank in exchange for a non-
transferable 10-year note that pays maximum interest of the one-
year London interbank offered rate minus one percentage point.
Libor was at 0.715 percent on April 19.

After 2013, the government’s foreign currency debt
obligations will total $50.3 billion, excluding the $27.9
billion in non-transferable notes sold to the central bank,
according to the latest Economy Ministry data.

While Fernandez has banned most foreign-currency purchases,
the reserve decline is prompting more Argentines to try to buy
dollars as central bank president Mercedes Marco del Pont pumps
pesos into the economy to keep borrowing costs low, said
Tavelli. With a 37 percent increase in the money supply over the
past year, the 304 billion peso ($59 billion) monetary base is
within 2 percent of its record high on Dec. 28.

Weakening Peso

Expectations of a steeper decline in the peso, which will
weaken a further 12 percent this year to 5.84 per dollar,
according to the median estimate of 16 analysts surveyed by
Bloomberg, may tempt exporters to hoard their grain until then,
according to Hernan Yellati, a strategist at BancTrust & Co. in
Miami. Argentines pay as much as 8.9105 pesos per dollar in a
parallel exchange market compared to the official rate of
5.1673.

The government’s revenue from export duties fell in March
for a fourth month, declining 30 percent from a year earlier,
the only tax segment to post a drop. Vladimir Werning, an
economist at JPMorgan in New York, estimates exports will total
$87.1 billion this year, an 8 percent increase from last year on
a better harvest.

In addition to fewer dollars being sold to the central
bank, Argentines withdrew $665 million from their dollar-
denominated savings accounts this year, contributing to the loss
in reserves, according to Werning. Banks deposit foreign
currency that is not loaned to exporters in Argentina’s central
bank, so when savers make withdrawals, the central bank returns
the cash to the bank and reserves decline.

‘Investor Attention’

“The decline in gross international reserves continues to
be a focus of investor attention,” Werning wrote in a report.
“The time that policymakers have bought with controls has not
been invested to resolve fundamental macro concerns, such as
high inflation and ongoing real exchange rate appreciation.”

Prices rose 24.4 percent in March from a year earlier,
opposition lawmakers, citing estimates from economists, said
April 11, as the peso weakened 14.7 percent in the past year.

Inflation and the peso’s decline led Vale SA (VALE5), the world’s
biggest iron-ore producer, to shelve a $5.9 billion potash
project in Argentina last month. The cost to develop the project
almost doubled to $11 billion, while Argentina refused to give
the Rio de Janeiro-based company any tax breaks, Chief Executive
Officer Murilo Ferreira said on March 18.

‘No Problem’

The nation’s savings are also being squeezed by state-owned
oil company YPF SA (YPFD), which will have to spend an additional $400
million to import fuel to supply service stations after a flood
and fire at its La Plata refinery reduced output.

Still, the government will have enough reserves to pay debt
at least through 2016, according to Luis Celasco, who manages
1.7 billion pesos of Argentina bonds at RJ Delta, a unit of
Raymond James Financial Inc. in Buenos Aires.

“I don’t think the drop in reserves below $40 billion is a
trigger for people to sell bonds,” Celasco said in a telephone
interview. “With the current picture, now that capital flight
has decelerated because of currency controls, there’s no
problem.”

The cost to protect $10 million of Argentine debt against
non-payment during five years with credit-default swaps plunged
1,037 basis points, or 10.37 percentage points, this month to
2,072 basis points, data compiled by CMA Ltd. show.

The swaps pay the buyer face value in exchange for the
underlying securities or the cash equivalent if a borrower fails
to adhere to its debt agreements.

Commodity Cycle

In commodity-dependent Peru, the central bank’s foreign
currency holdings have risen eight percent this year. In Brazil,
the world’s biggest shipper of coffee and orange juice and the
second-biggest exporter of soybeans, reserves have dropped just
0.4 percent to $377 billion.

“They’re underperforming relative to what their neighbors
are doing, so you kind of expect as a commodity producer in this
commodity cycle, they should be doing a little bit better,”
Gabriel Torres, an analyst at Moody’s Investors Service, said in
a telephone interview from New York. “It’s just purely because
of a lack of confidence in the government.”